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Property investing despite stamp duty increase

Is it Still Worth Investing in Property Since the Stamp Duty Increase?

What is stamp duty and why is it increasing?

Stamp duty is a tax you have to pay when you purchase property. First time buyers purchasing residential property for £300,000 or less pay no Stamp Duty Land Tax. Stamp duty is banded, and the percentage you pay rises incrementally depending on the property's value.

People who are purchasing additional properties, perhaps as a second home or to rent out to tenants, are subject to additional stamp duty charges. The additional band starts at 3% and rises depending on the cost of the property.

  1. How has stamp duty affected the profitability of UK property investment?
  2. Stamp Duty Increase Has Contributed to House Price Slump
  3. What is the Stamp Duty Holiday?
  4. Strategies to Avoid Stamp Duty or Minimise its Effect

How has stamp duty affected the profitability of UK property investment?

The 3% stamp duty increase came into effect on the 1st April 2016, however it was announced in George Osborne’s Autumn 2015 Budget.

The increase in stamp duty came as a massive blow to buy to let landlords and many thought it would dampen investors’ spirits and discourage people from property investment. Here, we present alternative options that can reduce the impact of the increase in stamp duty.

The 3% increase in stamp duty came into effect on the 1st April 2016, after previously being announced in George Osborne’s Autumn 2015 Budget. We explore whether it is still economically viable to invest in property since the increase, and what sort of properties you can invest in to minimise the effect of the stamp duty increase or completely bypass it altogether.


Stamp Duty Increase Has Contributed to House Price Slump

One of the main issues that the increase in stamp duty has caused, has been the increased cost in acquiring new property, which has subsequently caused a slump in house price inflation. Whilst this now means it is a good time for potential investors to consider purchasing additional properties, those who already own property will probably be disappointed with the growth in the market.

In particular, property prices in London are most affected by the increase in stamp duty, simply because house price are generally more expensive so the stamp duty levied on the properties is proportionately higher. This means that either demand may go down due to the high prices, or property prices may decrease to make up for the increase in stamp duty. In fact, Halifax’s April 2016 House Price Index announced negative growth in terms of house prices, as month on month April 2016 saw average house prices fall by 0.8%, which it attributed to a lack of confidence in the wider economy.


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What is the Stamp Duty Holiday?

From the 8th July 2020 to the 31st March 2021 inclusive reduced rates of stamp duty paid on residential property will apply. Investors buying additional properties to rent will benefit from the holiday as only the additional stamp duty rates will apply.

This means that only 3% stamp duty is applicable on property up to £500,000. Prior to the holiday and depending on the property value, investors could have paid anything between 3% - 8% on stamp duty. Properties priced up to £500,000 will now only incur a 3% stamp duty charge, whereas prior to the holiday it would have been 8%. If you were to buy a property for £350,000, you would save £7,500 in stamp duty.

Strategies to Avoid Stamp Duty or Minimise its Effect

Although the stamp duty increase may make some investors think twice about investing in property, it needn’t have to. There are plenty of ways property investors can work around the stamp duty increase or minimise its effect.

Purchase Property Through a Limited Company

Stamp duty land tax can be avoided by purchasing property in a company name using a business mortgage. This also allows for interest payments to be tax deductible, exponentially increasing your return on investment because mortgages can be granted up to seventy-five per cent of the value of the property which amounts to a lot of interest.

Number of Mortgage Products Available to Limited Companies Increasing

The number of products available to limited companies is increasing year-on-year. In H1 2015 there was an average of 99 products available to limited companies, but in H2 this rose to 147 products.

The number of mortgage applications made by companies now accounts for over a third (38%) of all mortgage applications, up from 15% in 2014. It’s also worth noting that mortgage acceptance rates are at an all-time high, so if you’re thinking of investing in property, now is a good time to apply for a mortgage. Avoid Stamp Duty Altogether with Alternative Investments Such as Car Park Investments

Furthermore, would-be buy-to-let investors are focusing on ways that they can avoid the stamp duty charges altogether or minimise its effect. Car park spaces are exempt from the 3% stamp duty charge because they’re classed as commercial property. Car park investments can also give an 8% net assured income for two years and has a five year exit strategy with buy-back option if you decide that the investment is not for you

Invest in Properties Outside of London for Lower Stamp Duty

Recommended Properties

Another option is to consider properties in areas outside of London. As mentioned previously in the article, properties in London are more expensive so there is proportionately more stamp duty to pay. As mentioned in our previous post, The Best Places to Invest in Property in the UK, cities such as Manchester and Liverpool command a much higher rental yield allowing you to maximise your profits. Properties in these cities outside of London are generally much lower, so the amount of stamp duty you’ll have to pay is much lower.

Birmingham is consistently considered one of the best areas for buy-to-let, and was recently named by the Council of Mortgage Lenders (CML) as the number one buy-to-let hotspot outside of London. Average property prices in Britain’s second city are considerably lower than property prices in London. According to Rightmove, overall average property prices in Birmingham currently stand at £168,062, compared to £556,350 in London. For property investors, this means that if they were to invest in property in Birmingham, they’d pay exponentially less in stamp duty compared to investing in London property.

Invest in Commercial Property

Commercial property investments are not subject to stamp duty if they are under £150,000. Student property and care homes are all classed as commercial property. Although most commercial investments are cash-only, they can be accessed at a lower entry point which makes them an ideal alternative to buy-to-let for those with less capital.

In conclusion, property investment is definitely still a viable way to achieve good returns, especially when interest rates for money kept in savings accounts is at record low. We advise property investors to make cautious decisions when it comes to investment, and consider investing in towns and cities outside of London where possible. For those looking to bypass stamp duty altogether, we suggest commercial investments that do not incur stamp duty charges.

For full details on what taxes you would need to consider if you want to invest in a buy to let property, read our buy to let tax guide. If you've decided that buy to let investing is something you wish to progress with, you may want to read our guide on mortgages available for buy to let property.

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